NCPA - National Center for Policy Analysis

THE POLITICS OF ESTATE TAX REFORM

February 10, 2010

Politicians like special interests because they like money, and they need organized interests to pay them.  Politicians thus proactively create or frame issues of high stakes to small groups.  Once politicians have these issues, they have little interest in resolving them.  The debate itself is a continuing opportunity on all sides of the issue to raise campaign contributions.  Estate tax repeal is a perfect example, says Edward J. McCaffery, a law professor at the University of Southern California, and a senior fellow with the National Center for Policy Analysis.

For example: 

  • Rich families pay to get rid of the tax; investment banks, insurance companies, large nonprofits and others pay to keep it.
  • According to a study published by the pro-estate tax groups Public Citizen and United for a Fair Economy, a group of 18 families, spending at least $27.7 million of their own money, orchestrated an effort aimed at repeal that totaled almost $500 million in lobbying expenditures between 1998 and 2004 alone.  

Nice work if you can get it, and Congress got it, says McCaffery.  There are similar incentives on the other side: 

  • In 1986, Congress instituted a generation-skipping tax (GST) on top of the estate tax to prevent multigenerational asset transfers designed to escape the estate tax.
  • Following the law of unintended consequences, the GST simply led to the repeal of the hallowed rule against perpetuities and the rise of dynasty trusts.
  • By 2003, some $100 billion worth of assets had moved into long-lived dynasty trusts, largely in South Dakota, a state whose revised laws welcomed the strange creatures from all over America.
  • Even a small piece of that enormous pie as fiduciary or other fees for assets under management would give some small groups high stakes to keep the estate tax alive. 

As long as there are votes that threaten to resolve the issue to either side's advantage, there is money to be had.  And so, McCaffery predicts, Congress will vote on the matter over and over, avoiding a final resolution. 

Source: Edward J. McCaffery, "The Politics of Estate Tax Reform," National Center for Policy Analysis, Brief Analysis No. 690, February 10, 2010. 

For text:

http://www.ncpa.org/pub/ba690 

 

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